H&M gave a personal guarantee to an NRI for a $13.5 million loan without taking permission from the RBI

The Madras High Court has dismissed a writ petition by Helios and Matheson (H&M) challenging the Rs5 lakh penalty imposed by the Enforcement Directorate (ED) on the company for violation of the Foreign Exchange Management (FEMA) Act. The company had offered a personal guarantee for a loan of $13.5 million to a non-resident Indian (NRI) without obtaining the mandatory prior permission from the Reserve Bank of India (RBI).

Chennai-based H&M has been involved in a battle with vMoksha Technologies (VMT) over the fraudulent acquisition of subsidiaries of VMT. In May, the Bombay High Court had ordered the resumption of proceedings against H&M in the same case. (Read, 'Bombay HC allows proceedings against Helios & Matheson')

Madras High Court judge T Raja observed that, "In the light of the foregoing discussion, I hold that the present writ petition is not maintainable and accordingly, the same is dismissed."

The ED raided H&M's Chennai office after it received a complaint from the RBI about the fraud and violation of FEMA by H&M in its acquisition of vMoksha Technology's subsidiary companies. Some incriminating documents were seized in the raid.

The matter dates back to 2005, when H&M entered into a share purchase agreement (SPA) with VMT's unit in Mauritius to acquire 100% of its equity for $13.5 million. H&M announced a $19 million buyout of vMoksha, that was co-founded by Rajeev Sawhney and Pawan Kumar (former CEO of the controversial DSQ Software), with Mr Sawhney investing the money and Mr Kumar running the operations. Mr Sawhney soon realised that he had been kept in the dark about many aspects of the deal.

He found that instead of receiving $19 million, a bank account had been opened fraudulently with State Bank of Mauritius in the name of vMoksha and this was used to borrow $13.5 million using a fake board sanction and false entries. That money was remitted to H&M ostensibly for subscription of redeemable preference shares on 28 June 2005.

The regional director of the Ministry of Corporate Affairs conducted a technical scrutiny of H&M and found that the loan was, indeed, obtained by falsifying the board minutes and making false entries. Worse, the H&M chairman provided a personal guarantee for this borrowing by vMoksha, even before acquisition of the subsidiaries or the transfer of funds for the acquisition.

The State Bank of Mauritius allegedly approved the loan, although the loan documents were unsigned and on plain sheets of paper instead of the company's letterhead. Indian authorities gave the approval for the deal on the condition that investment in VMT Mauritius should be paid out of the inward remittance of foreign exchange, through normal banking channels, and to invest with H&M it has to follow the prescribed norms.

As per the norms, a foreign company will have to bring the requisite funds from abroad and not leverage from the domestic market. VMT, Mauritius after availing the credit for remittance from the State Bank of Mauritius on 29 June 2005, remitted the entire amount of Rs58.37 crore to H&M's at the Chennai branch of the bank on 29 July 2005.

After the investigation by the ED, a show-cause notice was served to H&M for contravening FEMA rules for $13.5 million, equivalent to Rs.58.37 crore, in having stood as guarantors for obtaining the loan from State Bank of Mauritius.

H&M submitted a detailed explanation along with a letter stating that the authority had no jurisdiction to proceed against it, and that there was no need for an inquiry at all. It also challenged the proceedings and filed a writ petition in the high court.

The HC found that the company has not been denied the principle of natural justice as it did not bring on record to substantiate the claim and refused to interfere with the show-cause notice. The Court considered the company's plea that their grievance would stand redressed if a direction is issued to the ED for deciding the case of the petitioners on the basis of the explanation offered. It disposed off the writ petition and directed the ED to consider the company's objections within a period of four weeks of the receipt of a copy of the order.

After disposal of the petitions, H&M through a letter to the ED stated that there was no need for them to attend the scheduled personal hearing. The company did not avail the two opportunities of personal hearing given to them. The ED, considering H&M's explanation through letter and considering the time limit given by the judge imposed a penalty of Rs5 lakh on H&M.

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In order to enable people with small saving potential and to increase reach of mutual fund products in urban areas and smaller towns, SEBI has decided that a transaction charge per subscription of Rs10,000 and above be allowed to be paid to the distributors

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) on Monday said new investors will now have to pay an extra Rs150 for investment of Rs10,000 and above in mutual funds (MFs), while the charge will be Rs100 for existing investors, reports PTI.

“In order to enable people with small saving potential and to increase reach of mutual fund products in urban areas and smaller towns, it has been decided that a transaction charge per subscription of Rs10,000 and above be allowed to be paid to the distributors,” SEBI said in a circular.

Investors are already paying a commission in some cases, besides up to 2.5% of their investment towards expanses of fund management.

Now the distributors would be allowed to charge Rs100 as transaction charge per subscription. No charge can be made for investments below Rs10,000.

“As an incentive to attract new investors, the distributor may be paid Rs150 as transaction charge for a first time investor in mutual fund,” the circular added.

For systematic investment plans (SIPs), the transaction charges can be recovered in three or four instalments, it added.

SEBI further said that the investors would continue to pay upfront commission directly to distributors.

Last month SEBI chairman UK Sinha after the SEBI board meeting had said that transaction fee is some way to compensate the distributors, who may have lost interest in the distribution of MF products.

Experts said this move is seen as back-door imposition of entry load, a fee charged to the investors at the time of their investment in a MF scheme.

MF distributors had been demanding re-introduction of entry load, which was abolished by SEBI in 2009. Then the board was headed by CB Bhave. Distributors have been complaining that their business has taken a hit since then.

SEBI said that in the interest of investors, there is a need to regulate the distributors by putting in place due diligence process to be by asset management companies.

SEBI said the due diligence process may be initially applicable for distributors having presence in more than 20 locations or those who have received over Rs1 crore commission in a year.

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While currently, an investor has to enter into a number of agreements depending on his trading preferences, market regulator SEBI said that henceforth new investors need to sign only one trading account opening form and not a multiple set of documents

Mumbai: Simplifying the procedure for investors entering the capital market, the Securities and Exchange Board of India (SEBI) on Monday said they need to sign only one trading account opening form and not a multiple set of documents, reports PTI.

“The client will now be required to sign only on one document i.e. account opening form,” market regulator SEBI said, adding it is being done with a view to simplifying and rationalising the account opening process.

At present, an investor has to enter into a number of agreements depending on his trading preferences, like stock exchanges, segments, internet/wireless technology-based trading, etc. As a result, the investors need to put his sign on a large number of documents.

SEBI said that henceforth, in the trading account opening form, the client would need to put his signatures instead of saying ‘yes’ or ‘tick mark’ while indicating preferences for trading.

As part of simplifying the account opening process, SEBI has devised uniform documentation to be followed by all the stock brokers and trading members.

In the account opening process, stock brokers and trading members would also give a tariff sheet specifying various charges, including brokerage, payable by the client to avoid any disputes at a later date.

Besides, any voluntary clause or document added by the stock brokers shall form part of the non-mandatory documents, SEBI added.

The market regulator has asked the stock brokers to take necessary steps to implement simplified procedure in respect of all new clients within 15 days.

The decision was taken, it said, in consultation with major stock exchanges and market participants.

However, in case the investor wants to avail running account facility, execute power of attorney, he would have to give specific authorisation to the stock broker in order to avoid any dispute in the future.